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Financial Insight: MLPs—Stuck in the Stock Market

How recent poor performance reflects on the value of the c-store business

CHICAGO -- In just five years, the convenience-store industry has seen well over 10,000 convenience stores come under master limited partnership ownership, tying the industry’s growth and success to a stock-market index. chart

The unfortunate part is that index—one driven by tax structure and benefits—is one of the poorest performing on Wall Street.

Master limited partnership (MLP) stock prices continue getting hammered with the rest of the stock market and, in fact, worse. The index most representative of the c-store industry is the Alerian MLP Index (AMLP), which declined more than 15% in the third quarter of 2015 alone. Only two quarters in MLP history had larger declines, one of which was the nasty fourth quarter of 2008.

Thus far, the AMLP has not declined as precipitously as it did just prior to the 2008-2009 Great Recession, but it's getting close.

The C-Store Connection

Understandably, the index decline is partially due to huge declines in energy-related commodity prices, but even midstream pipeline-related MLPs have fallen sharply despite excellent dividends and earnings. The carnage has also affected downstream MLPs, such as Energy Transfer Equity LP (ETE), Cross America Partners LP (CAPL) and Global Partners (GLP), even though all of these companies have benefited handsomely from lower oil prices.

CST Brands Inc. (CST) even announced a sizable open market stock buyback program of Cross America Partners LP, its associated MLP for property drop downs, which has not helped either companies’ stocks thus far.

Further, ETE is clearly changing its company focus with the recently announced huge purchase of Williams Energy for $32.6 billion—ah, cheap money. Interestingly, though, Williams had just rejected an offer from ETE for $48 billion in June of this year when ETE's stock price was much higher.

Where is the common thread with the MLP group, despite excellent earnings in all but the direct commodity related stocks so far? All of these companies have clearly benefited by the incredibly long string of low interest rates. In a slowing world economy, interest rates do not seem to be going up any time soon. Low commodity prices appear to be around for quite a while too.

The Federal Reserve is out of ammunition, the Obama Administration can't work with Congress on anything, and 2016 is a big election year with uncertain outcomes. The Fed seems to be “talking up” the economy by saying it will raise rates, yet it voted 9 to 1 recently against a 0.25% raise! So high-quality companies and U.S. government rates seem stable, at least for the time being.

Wall Street React

Unfortunately, right or wrong, Wall Street seems to be putting MLPs in the junk-bond, high-yield category.  A good gauge of future bond market, stock market and economic risk has always been Barron's Confidence Index, which compares the yield percentages of the low risk yield market, like treasury bonds, to high-yield corporate bond rates. This normally stable ratio has declined a significant 10% from last year at this time, much of which occurred in the last month.

Perhaps at some point the banks may start to take note and look at their lending practices to the entire MLP market differently after seeing the still-developing carnage in the oil patch. The banking industry is still smarting from penalties imposed due to their lending practices prior to the last recession, and the Obama Administration continues with new regulations and restrictions. The bottom line is that MLPs' cost of capital has recently begun to increase significantly from both the debt and equity side.

This is all interesting, but how will it affect marketers and the value of our companies? After all, we not only profitably survived the 2009 Great Recession, we thrived through lower oil prices, and it feels like deja vu.

A slowing U.S. economy might affect fuel volumes somewhat and maybe store sales a little, but overall, store performance has been excellent. However, it would be easy to imagine fuel margins being somewhat lower than the last two years' record levels. And we all know refiners like to take some of retailers' fat margins when they can, especially if they get pinched by the inability to buy distressed domestic crude oil that currently cannot be exported by law. Slowing lending and a slowing economy usually impact real-estate values, too. Deflation stinks.

It would seem that, at some point, the MLPs and their sponsors will not be able to be as aggressive in their purchases as they have been in the past. They will be forced to pass on certain acquisition opportunities or at least lower their purchase-price multiples from the record recent highs.

Fortunately for would-be sellers, excellent cash flows from the larger industry players such as Circle K, 7-Eleven, Casey’s General Stores, World Fuels, etc., should keep them active, especially if sellers’ expectations decline. And some, such as Marathon, frequently have synergies going beyond the usual synergies accruing to buyers with only retail assets.

But at least in the past year or two, the surge to higher multiples was clearly helped by the MLPs that Wall Street encouraged to grow. Consequently, an important competitive group may become much less aggressive.

Overall, we are lucky to be associated with an industry that is doing so well. How would you like to be an oil or gas producer right now, let alone a coal producer?

Remember in 1999 when everyone was so worried about Y2K? Convenience stores were one of the top five items everyone wanted to put in a time capsule if the world ended. But at least based on history, to expect that selling multiples and possibly real-estate and business values are not vulnerable to decline is wishful thinking.

Keep an eye on the MLP Index.A stock analyst a week ago predicted the demise of the entire MLP market and created a large "spike bottom" in the MLP stocks; recall they and the related indices are thinly traded and volatile. The average current yield is about 8%.The index nearly doubled in value in the year coming off its low point in late 2008, but it was a painful decline beforehand.

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